When we asked “Why do you invest?” during our recent inaugural The Straits Times - UBS Youth Finance Forum, the common responses from the participants, mostly undergraduates, included wanting to afford a property and planning for retirement, among other reasons.
To me, investing is letting your money work for you, rather than you working for money.
In a savings account, your money is only resting and earning interest from 0.05 per cent to 0.4 per cent per annum, which is below Singapore’s long-term average inflation rate of 1.1 per cent. That means that our savings are actually shrinking in real terms, after adjusting for inflation.
Until recently, the interest rate on fixed deposits was also below the inflation rate. If you invest your savings in the financial markets, you have the opportunity to benefit when companies perform well.
For instance, if you invest your money in a stock with strong underlying business and management, the return on this stock, which may take the form of dividend or share price appreciation, could be significantly higher than on bank deposits. Of course, all investments have inherent risk.
However, if we invest prudently and take a long-term view, putting our money to work through investment is the way to accumulate wealth, which will allow us to pursue our dreams – be it a dream home or early retirement.
How long does it take to accumulate wealth through investment?
It depends on one’s investment horizon and the compounding rate of return on one’s investment. A useful guide is the Rule of 72, which provides an approximate number of years to double one’s money, using 72 divided by the rate of return.
Assuming one invests $50,000 in a mutual fund at the age of 30 that generates a return of 6 per cent per annum. If the principal and return are re-invested at the same rate year on year, using the Rule of 72, the investment should double in value to $100,000 in 12 years (72 divided by 6) at the age of 42.
This amount would double again to $200,000 at age 54 ($100,000 invested at 6 per cent p.a.), and to $400,000 at age 66 ($200,000 invested at 6 per cent p.a.), and so on.
By staying invested, the compounding effect is a powerful way of accumulating wealth over time.
How should one invest?
Prudence is key in investment. One has to read extensively from credible sources and be cognisant of economic and geopolitical developments, as well as evolving trends in consumer behaviour and technology.
If you are into share investments, read up on the industry and company which you are keen on, look at the company’s performance and financial track record, and ascertain if its products or services are entrenched or at risk of being replaced by competitors or new technology, so as to make an informed decision.
If stock picking is not your cup of tea, you may consider investing in an ETF or a diversified stock index. My personal advice would be to work with a trusted and knowledgeable banker who can help you build a diversified investment portfolio and hand-hold you in navigating through market volatility.
In UBS, we advise our clients to bucket their investments into our unique Liquidity, Longevity, Legacy (3L) strategy to meet their lifetime goals.
• Liquidity – liquid fund set aside for the family’s cash flow needs over the next two to five years;
• Longevity – assets designed to satisfy lifetime needs and focused on long-term growth to meet the clients’ retirement lifestyle;
• Legacy – assets lasting beyond the investor’s lifetime and earmarked for philanthropic goals and future generations.
By structuring the investment portfolio in the respective buckets, clients can stay the course in their investments and comfortably ride through market cycles.
When should one start investing?
In the recent forum, I advocated “Owning Your Worth” as early as 18 years old. Time is money. In the world of investing, compounding value over the long term can be a powerful means to wealth accumulation.
In 2019, we surveyed women globally and these are the statistics:
• Women are living longer. 64 per cent of women in Singapore believe they will outlive their spouses;
• Women are primarily involved in budgeting only; 77 per cent manage day-to-day expenses;
• Women tend to leave major investment decisions to their spouses; 72 per cent let their spouses take the lead; 8 per cent share decisions equally; and only 20 per cent take the lead in investments.
You may think that the above findings were from women in the older segment. On the contrary, the survey covered women in the 20 to 34 age group and who are generally well-educated.
It is not uncommon to hear of women at a loss in making any financial decisions after losing their spouses unexpectedly. Hence, the message for women is to build their financial confidence, that is, to own their worth as early as 18.
The message also applies to men to involve their girlfriends, partners or spouses as early as possible. From studies, 96 per cent of the women who shared in the long-term financial decisions are better prepared for tomorrow.
To conclude, understanding your financial situation at every stage of your life is key to being prepared for all of life’s challenges and opportunities.
- The writer is executive director and market team leader at UBS Global Wealth Management.